Competition for Institutional Grade MOBs Reaches ‘Fever Pitch’

By Mary Kate Nelson | October 18, 2016

Competition among buyers of institutional-grade medical office buildings (MOBs) has reached a “fever pitch,” according to a recent article from CoStar Group.

The single biggest reason behind this? The fact that several traditionally seniors housing-focused major investment funds and real estate investment trusts (REITs) are diversifying their portfolios and reallocating large sums for purchasing MOBs and hospitals, Marcus & Millichap told CoStar.

Additionally, though overall MOB prices peaked a year ago, pricing for core MOB assets has become more competitive due to investors of all types pulling away from secondary and tertiary markets in favor of reliable core assets in primary markets, Avison Young principal Jim Kornick told CoStar.

Specifically, MOB transaction velocity has accelerated 17% in the trailing 12-month period ending June 30, Marcus & Millichap said. Average pricing per square foot of medical office space has also risen 17% to $230 per sqare foot (PSF) since the conclusion of 2014, according to Marcus & Millichap’s analysis of CoStar data.

“We had tremendous 20% growth from 2014 to 2015, and clearly, it’s continuing on into 2016, albeit maybe not at the same high levels,” Marcus & Millichap’s John Smelter told CoStar. “The demand is absolutely there.”

The MOB vacancy rate fell 80 basis points to 8.6% in the second quarter from a year ago, hitting its lowest level in eight years, Smelter added.

In recent quarters, institutional-grade MOB property deals in particular have experienced a noteworthy increase in transaction velocity, according to Marcus & Millichap. Off-campus properties with long-term leases and strong tenants are selling for a premium; other kinds of off-campus MOBs, including properties in need of repositioning or those located in secondary or tertiary markets, can trade with first-year yields as many as 200 basis points higher.

Other MOB investors who used to go after stabilized assets in core markets are now avoiding the higher priced, lower risk options in favor of value-add properties, or are even participating in development and equity placement, Marcus & Millichap noted.

Additionally, major health-care providers are beginning to control a major share of MOB leasing activity as health care systems and hospitals keep buying out private practices and transferring outpatient services off of main hospital campuses. This has led to increased demand for newer, modern buildings with more flexible floor plans, and a rise in both new projects and deliveries of new space in 2016, Marcus & Millichap told CoStar.